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Weekend Update – September 8, 2013

Employment Situation Report, Taper, new Yahoo! (YHOO) logo, Syria.

Not a line from a new, less catchy Billy Joel song, but a transition week going from the quietude of summer, which was mostly focused on fundamentals to the event driven and emotional rest of the year when the world seems to be perennially on fire, jumping from crisis to crisis.

In a few days traffic in my part of the country returns back to its normal heinous condition as our nation’s elected officials return from a much deserved 37 day vacation that they were unable to truncate by a few days to address some outstanding issues.

Just to be clear, it’s the electorate that deserved the break, but now they’re back and we can settle into our more normal state of dysfunction, while decreasing our focus on such mundane things as earnings. For the record, I don’t get out onto the roads very much anymore, having given up gainful employment for a life of ticker watching, but it’s not as easy to escape the results of having exercised our democratic rights.

Continue reading “Seems Like Old Times” on Seeking Alpha

 

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Weekend Update – May 19, 2013

Shades of 1999.

I’m not certain that I understand the chorus of those claiming that our current market reminds them of 1999.

Mind you, I’m as cautious, maybe much more so than the next guy and have been awaiting some kind of a correction for more than 2 months now, but I just don’t see the resemblance.

Much has also been made of the fact that the S&P 500 is now some 12% above its 200 Day Moving Average, which in the past has been an untenable position, other than back when sock puppets were ruling the markets. Back then that metric was breached for years.

Back in 1999 and the years preceding it, the catalyst was known as the “dot com boom” or “dot com bubble” or the “dot com bust,” depending on what point you entered. The catalyst was clear, perhaps best exemplified by the ubiquitous sock puppet and the short lived PSINet Stadium, back then home to the world Champion Baltimore Ravens. The Ravens survived, perhaps even thrived since then, while PSINet was a casualty of the excesses of the era. When it was all said and done you could stuff PSINet’s assets into a sock.

During the height of that era the catalyst was thought to be in endless supply. But in the current market, what is the catalyst? Most would agree that if anything could be identified it would likely be the Federal Reserve’s policy of Quantitative Easing.

But as last week’s rumor of its upcoming end and then an article suggesting that the Federal Reserve already has an exit plan, the catalyst is clearly not thought to be unending. Unless the economy is much worse than we all believe it to be the fuel will be depleted sooner rather than later.

Now if you’re really trying to find a year comparable to this one, look no further than 1995, when the market ended the year 34% higher and never even had anything more than a 2% correction.

If llke me, and you’re selling covered options; let’s hope not.

For me, this Friday marked the end of the May 2013 option cycle. As I had been cautious since the end of February and transitioned into more monthly option contract sales, I am faced with a large number of assignments. Considering that the market has essentially been following a straight line higher having so many assignments isn’t the best of all worlds.

While I now find myself with lots of available cash the prevailing feeling that I have is that there is a need to protect those assets more than before in anticipation of some kind of correction, or at least an opportunity to discover some temporary bargains.

This week I have more than the usual number of potential new positions, however, I’m unlikely to commit wholeheartedly to their purchase, as I would like to maintain about a 40% cash position by the end of next week. I’m also more likely to continue looking at monthly option sales rather than the weekly contracts.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details). Additionally, although the height of earnings season has passed there may still be some more opportunity to sell well out of the money puts prior to earnings on some reasonably high profile names..

There’s no doubt that the tone for the week was changed by the down to earth utterances of David Tepper, founder of the Appaloosa Hedge Fund. He has a long term enviable record and when he speaks, which isn’t often, people do take notice. Apparently markets do, as well.

However, among the things that he mentioned was that he had lightened up on his position in Apple (AAPL). It didn’t take long for others to chime in and Apple shares fell substantially even when the market was going higher. Although I was waiting for Apple to get back into the $410-420 range, the rebound in share price following news of reduced positions by high profile investors is a good sign and I believe warrants consideration toward the purchase of new shares.

I recently purchased shares of Sunoco Logistics (SXL) in order to capture its generous and reliable dividend. My shares were assigned this past Friday, but I’m willing to repurchase, even at a higher price and even with a monthly option contract to tie me down. In the oil services business it is a lesser known entity and trades with low volume, however, it will share in sector strength, just in a much more low profile manner.

Pfizer (PFE) is another stock that was recently purchased in order to capture it’s dividend and premium and was also assigned this past week. However, it is among the “defensive” stocks that I think would fare relatively well regardless of near term market direction. Like many others that do offer weekly options, my inclination is to consider the selling monthly contracts for the time being.

While healthcare has certainly already had its time in the sun in 2013 and Bristol Myers Squibb (BMY) has had its share of that glory, after some recent tumult in its price and most recently its next day reversal of a strong move the previous day, I find the option premium appealing. However, as opposed to Pfizer, which I’m more inclined to consider a monthly option, Bristol Myers has too much downside potential for me to want to commit for longer periods.

Although I already own shares of Petrobras (PBR) and am not a big fan of adding additional shares after such a strong climb hig
her off of its rapidly achieved lows, Petrobras recently and quietly had quite an achievement. WHile everyone was talking about Apple’s $17 Billion bond offering that had about $50 Billion in bids, Petrobras just closed an $11 Billion offering with more than $40 Billion in bids.

Caterpillar (CAT), which I also currently own, is a perennial member of my portfolio. To a very large degree it has been recently held hostage to rumors of contraction and slowing in the Chinese economy. It has, however, shown great resiliency at the current price level and has been an excellent vehicle upon which to sell call options.

As shown in the table above, I’ve owned shares of Caterpillar on 11 separate occasions in less than a year. While the price has barely moved in that period, the net result of the in and out trades, as a result of share assignments has been a gain in excess of 35%.

The more ambiguity and equivocation there is in understanding the direction of the Chinese economy the better it has been to own Caterpillar as it just bounces around in a fairly well defined price range, making it an ideal situation for covered call strategies.

Continuing the theme of shares that I currently own, but am considering adding more shares, is British Petroleum (BP). With much of its Deepwater Horizon liabilities either behind it or well defined, shares appear to have a floor. However, in the past year, that has already been the case, as my experience with British Petroleum ownership has paralleled that of Caterpillar in both the number of separate times owning shares and in return – only better.

Of course, better than either Caterpillar or British Petroleum has been Chesapeake Energy (CHK). I’ve owned it 18 times in a year. It too has had much of its liability removed as Aubrey McClendon has left the scene and it is already well known that Chesapeake will be selling assets under a degree of duress. With its turnaround on Thursday and dip below $20, I am ready to add even more shares.

I’ve probably not owned Conoco Phillips (COP) as much as I would have imagined over the past year probably As a result of owning British Petroleum and Chesapeake Energy so often. Shares do go ex-dividend this week which always adds to the appeal, particularly when I’m in a defensive mode.

Salesforce.com (CRM) was a recommendation last week. I did make that purchase and subsequently had shares assigned. This week it reports earnings and as many of the earnings related trades that I prefer, it offers what I believe to be a good option premium even in the event of a large downward move. In this case a 1% return for the week may be achieved if share price doesn’t exceed 8%

Sears Holdings (SHLD) always seems like a ghost town when I enter one of its stores, although perhaps a moment of introspection would indicate that I drive shoppers away. I’m aware of other story lines revolving around Sears and its real estate holdings, but tend not to think in terms of what has been playing out a s a very, very long term potential. Instead, I like Sears as a hopefully quick earnings trade.

In a week that saw beautiful price action from Macys (M), Kohls (KSS) and others, perhaps even Sears can pull out good numbers and even provide some positive guidance. However, what appeals to me is a put sale approximately 8% below Friday’s close that could offer a 4% ROI for the month or shorter.

Another retailer, The Gap (GPS), has certainly been an example of the ability to arise from the ashes and how a brand can be revitalized. Along with it, so too can its share price. The Gap reports earnings this week and has already had an impressive price run. As opposed to most other earnings related trades, I’m not looking for a significant downward move and the market isn’t expecting such a move either. Based on some of the strong retail earnings announced this past week I think The Gap may be an outright purchase, but I would be more likely to look at a weekly option sale and hope for quick assignment of shares.

TIVO (TIVO) is one of those technologies that I’ve never adopted. Maybe that’s because I never leave the house and the television is always on and I rarely see a need to change the station. But here, too, I believe TIVO offers a good short term opportunity even if shares go down as much as 20% following Monday’s earnings release. In the event that shares go appreciably higher, it is the ideal kind of earnings trade, in that coming during the first day of a monthly option contract, it could likely be quickly closed out and the money then used for another investment vehicle.

Om the other hand, Dunkin Brands (DNKN) is definitely one of those technologies that I’ve adopted, especially when having lived in New England. Fast forward 20 years and they are now everywhere in the Mid-Atlantic and spreading across the country as their new offerings also spread waists around the country. Going ex-dividend this coming week and offering a nice monthly option premium, I may bite at more than a jelly donut. However, it is trading at the upper end of its recent price range, like all too many other stocks.

Finally, Carnival (CCL) hasn’t exactly been the recipient of much good news lately. Although it’s up from its recent woes and lows. It does report earnings at the end of the June 2013 option cycle, but it also goes ex-dividend in the first week of the cycle, in addition to a offering a reasonable option premium

Traditional Stocks: Bristol Myers, Caterpillar, Pfizer, Sunoco Logistics

Momentum Stocks: Apple, Chesapeake Energy, Petrobras

Double Dip Dividend: Carnival Line (ex-div 5/22), Conoco Phillips (ex-div 5/22), Dunkin Brands (ex-div 5/23)

Premiums Enhanced by Earnings: Salesforce.com (5/23 PM), Sears Holdings (5/23 AM), The Gap (5/23 PM), TIVO (5/20 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

 
 

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Weekend Update – February 24, 2013

We all engage in bouts of wishful thinking.

On an intellectual level I can easily understand why it makes sense to not be fully invested at most moments in time. There are times when just the right opportunity seems to come along, but it stops only for those that have the means to treat that opportunity as it deserves.

I also understand why it is dangerous to extend yourself with the use of margin or leverage and why it’s beneficial to resist the need to pass up that opportunity.

What I don’t understand is why those opportunities always seem to arise at times when the well has gone dry and margin is the only drink of water to be found.

Actually, I do understand. I just wish things would be different.

I rely on the continuing assignment of shares and the re-investment of cash on a weekly basis. My preference is for anywhere from 20-40% of my portfolio to be turned over on a weekly basis.

But this past week was simply terrible on many levels. Whether you want to blame things on a deterioration of the metals complex, hidden messages in the FOMC meeting or the upcoming sequester, the market was far worse than the numbers indicated, as the down volume to up volume was unlike what we have seen for quite a while.

On Wednesday the performances of Boeing (BA), Hewlett Packard (HPQ) and Verizon (VZ), all members of the Dow Jones Industrials Index helped to mask the downside, as the DJIA and S&P 500 diverged for the day. Thursday was more of the same, except Wal-Mart (WMT) joined the very exclusive party. So far, this week is eerily similar to the period immediately following the beginning of 2012 climb and immediately preceding a significant month long decline of nearly 10%,beginning May 2012.

That period was also preceded by the indices sometimes moving in opposite directions or differing magnitudes and those were especially accentuated during the month long decline.

So what I’m trying to say is that with all of the apparent bargains left in the carnage of this trading shortened week, I don’t have anywhere near the money that I would typically have to plow in head first. I wish I did; but I don’t. I also wish I had that cash so that I wouldn’t necessarily be in a position to have it all invested in equities.

Although that margin account is overtly beckoning me to approach, that’s something that I’ve developed enough strength to resist. But at the same time, I’m anxious to increase my cash position, but not necessarily for immediate re-investment.

As usual the week’s potential stock selections are classified as being in Traditional, Momentum, Double Dip Dividend or “PEE” categories (see details).

Cisco (CSCO) was one of those stocks that I wanted to purchase last week, but like most in a wholly unsatisfying week, it wasn’t meant to be. With earnings out of the way and some mild losses sustained during the past week, it’s just better priced than before.

Although there have been periods of time that I’ve owned shares of both Caterpillar (CAT) and Deere (DE), up until about $10 ago on each stock there has rarely been a time over the past 5 years that I haven’t owned at least one of them. This past week saw some retreat in their prices and they are getting closer to where I might once again be comfortable establishing ownership.

Lockheed Martin (LMT) is one of those stocks that I really wished had offered weekly option premiums. Back in the days when there was no such vehicle this was one of my favorite stocks. This week it goes ex-dividend and that always gets me to give a closer look, especially after some recent price drops. Dividends, premiums and a price discount may be a good combination.

Dow Chemical (DOW) has been in my doghouse of late. That’s not any expression of its quality as a company, nor of its leadership. After all, back when the market last saw 14,000, Dow Chemical was among those companies whose shares, dividends and option premiums helped me to survive those frightening days. But after 2009 had gotten well entrenched and started heading back toward 14000, the rest of the market just left Dow behind. Then came weekly options and Dow Chemical didn’t join that party. More recently, as volatility has been low, it’s premiums have really lagged. But now, at its low point in the past two months for no real reason and badly lagging the broad market, it once again looks inviting.

Lorillard (LO) was on my radar screen about a month ago, but as so often happens when it came time to make a decision there appeared to be a better opportunity. This week Lorillard goes ex-dividend. Unfortunately, it no longer offers a weekly option, but this is one of those companies that if not assigned this month will likely be assigned soon, as tobacco companies have this knack for survival, much more so than their customers.

MetLife (MET) was on last week’s radar screen, but it was a week that very little went according to script. Maybe this week will be better, but like the tobacco companies that are sometimes the bane of insurance companies, even when paying out death benefits, somehow these companies survive well beyond the ability of their customers.

United Healthcare (UNH) simply continues the healthcare related theme. Already owning shares of Aetna (AET), I firmly believe that whatever form national healthcare will take, the insurance companies will thrive. Much as they have done since Medicaid and Medicare appeared on the national landscape and they moaned about how their business models would be destroyed. After 50 years of moaning you would think that we would all stop playing this silly game.

The Gap (GPS) reports earnings this week, along with Home Depot (HD) as opposed to most companies that I consider as potential earnings related trades, there isn’t a need to protect against a 10-20% drop. At least I don’t think there is that kind of need. But whereas the concern of holding shares of some of those very volatile companies is real, that’s not the case with these two. Even with unexpected price movements eventually ownership will be rewarded. The fact that Home Depot gained 2% following Friday’s upgrade by Oppenheimer to “outperform” always leads me to expect a reversal upon earnings release.

On the other hand, when it comes to MolyCorp (MCP) there’s definitely that kind of need to protect against a 20% price decline. Always volatile, MolyCorp got caught in last week’s metal’s meltdown, probably unnecessarily, since it really is a different entity. Yet with an SEC overhang still in its future and some investor unfriendly moves of late, MolyCorp doesn’t have much in the way of good will on its side.

Nike (NKE) goes ex-dividend this week and its option premiums have become somewhat more appealing since the stock split.

Salesforce.com (CRM) is another of those companies that I’m really not certain what it is that they do or provide. I know enough to be aware that there is drama regarding the relationship between its CEO, Mark Benioff and Oracle’s mercurial CEO, Larry Ellison, to get people’s attention and become the basis of speculation. I just love those sort of side stories, they’re so much more bankable that technical analysis. In this case, a xx% drop in share price after earnings could still deliver a 1% ROI.

Finally, two banking pariahs are potential purchases this week. I’ve owned both Citibank (C) and Bank of America (BAC) in the past month and have lost both to assignment a few times. As quickly as their prices became to expensive to repurchase they have now become reasonably priced again.

Although Friday’s trading restored some of the temporarily beaten down stocks a bit, a number still appear to be good short term prospects. I emphasize “short term” because I am mindful of a repeat of the pattern of May 2012 and am looking for opportunities to move more funds to cash.

I don’t know if Friday’s recovery is a continuation of that 2012 pattern, but if it is, that leads to concern over the next leg of that pattern.

For that reason I may be looking at opportunities to increase cash levels as a defensive move. In the event that there are further signals pointing to a strong downside move, I would rather be out of the market and miss a continued upside move than go along for the ride downward and have to work especially hard to get back up.

I’ve done that before and don’t feel like having to do it again.

Traditional Stocks: Caterpillar, Cisco, Deere, Dow Chemical, MetLife, United Healthcare

Momentum Stocks: Citibank

Double Dip Dividend: Bank of America (ex-div 2/27), Lockheed Martin (ex-div 2/27), Lorillard (ex-div 2/27), Nike (ex-div 2/28)

Premiums Enhanced by Earnings: Home Depot (2/26 AM), MolyCorp (2/28 PM), Salesforce.com (2/28 PM), The Gap (2/28 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

 

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Weekend Update – February 10, 2013

On Wednesday of this week, the Postmaster General, Patrick Donahoe, made the announcement that many of us had been expecting for years as the red ink lived up to its a visual onomatopoeia name and hemorrhaged.

No more Saturday delivery for ordinary mail. Unless I’m going away to summer camp this year, I’m not anticipating any extended grieving period for the loss, although like so many other things, the principal wags the principle.

It was a major news story in an otherwise slow news week. Surprisingly, what had gone unnoticed was the additional comment that effective immediately gloom of night would be sufficient cause to suspend delivery. Rain and snow are now also potential impediments to service, regardless of a centuries old social contract.

It’s a new world.

Forget about social contracts or expectations of behavior. Although if you follow the stock market you’re probably accustomed to broken dreams and hopes and rarely come to expect the expected.

Increasingly, data is ignored for its objective and descriptive properties. For example, when The Gap (GPS) announces great quarterly sales, as it did this week, it’s shares fell 4%, despite everyone agreeing that the results were extraordinary.

Equally common is the incredible emphasis now placed upon guidance, as if those issuing guidance have any greater ability to read the future than does the head of a close knit household. As much as I thought I knew about my family I don’t think I ever guessed anything correctly even a day into the future.

Have you ever visited a physicians office and browsed through some dated magazines? As it turns out, with near universal application, those whom we consider to be futurists have a fairly poor track record. Yet, when it comes to guidance, it is the closest thing we have to the gospel and fortunes are made or lost on the basis of the prognostications of people every bit as flawed as the guy you ignore on the subway platform every day.

For me, the past few weeks have broken some personal and inter-personal social contracts. As a die hard covered option investor, risk is the antithesis of everything I value. But as the market has been climbing higher and higher, it’s become harder and harder to find new places to park money. Additionally, the reduced premiums resulting from reduced volatility make it harder to live that life style to which I’ve become so accustomed.

That means only one thing and the devil has to be embraced.

Over the past few weeks I’ve had difficulty finding well priced and conservative investments that would feed my insatiable appetite. As a result, there have been more high beta name and more earnings related plays, not to mention lots more antacids. But sometimes you just do what has to be done.

This coming week looks to be a little different thanks to some market hesitancy. Blame it on Europe, blame it on Draghi, or just blame it on burn-out, I don’t really care, because as bad as we are at telling the future, we’re at least equally as bad at recognizing causation and correlation. It’s not like pornography. You don’t necessarily know it when you see it. But for whatever reason, this week, unlike the preceding month, it seemed easier to spot some lesser risk potential investments

As always, stocks are categorized as being either Traditional, Momentum, Double Dip Dividend or “PEE” (see details).

British Petroleum (BP) has no shortage of legal issues still awaiting it. To me it’s mind boggling that judgments and fines of $20 Billion could possibly have come as good news, but that is how news is interpreted. For some, perhaps more rational, British Petroleum’s inability to have its share price keep up with the likes of its partners in evil, Halliburton (HAL) and Transocean (RIG) is a sign of the legal liability overhang.

For me, it is finally down enough that I am interested in re-purchasing shares last owned a month ago, which to me seems like an eternity, since at the moment I own neither its shares, nor Halliburton or Transocean, usually mainstays of my portfolio. The dividend this week is a bonus.

As long as on the energy theme, Southwestern Energy (SWN) was a potential selection from last week that went unrequited. At this level it still looks like a reasonable trade and resultant ROI after selling an in the money option, in a market that may be taking a little break

The Limited (LTD) is one of those retailers that I never seem to own often enough, which is odd since I’m a serial re-purchaser of stocks that I’ve owned and that subsequently are assigned due to the use of covered calls. It has a good dividend, including regular use of special dividends and trades in a reasonably tight range. During the final week of a monthly option it becomes a bit more appealing to me. However, if not assigned next Friday
and faced with owning shares for at least an additional month, it dies go ex-dividend early in the March 2013 option cycle. Although I own more retailers than I would like, at the moment, this is one for which it may be worth bending some diversification rules.

DuPont (DD) was one of those stocks that I regularly owned when I first started selling options. A combination of good premiums, reliable dividends and price appreciation, especially after early 2009 made it a great income generator. These days, lower volatility has taken its toll on the premiums and the availability of only monthly options has made me look elsewhere. However, this week DuPont goes ex-dividend, and as the final week of the monthly option cycle it effectively trades as a weekly option, although you have to be prepared to own it through the next cycle or longer.

Walter Energy (WLT) and Cliffs Natural Resources (CLF) seem to go hand in hand in the speculative corner of my portfolio. It goes ex-dividend this week and always offers a nice option premium in exchange for the risk that is being taken on. A caveat that should be considered for adding new shares is that if shares are not assigned by the end of the week, Walter Energy reports earnings the following week and that may be more excitement than many would want to accept. Writing a deeper in the money call or a longer duration call may be strategies to reduce that kind of stress.

Baidu (BIDU) is one of the very few Chinese companies that I ever consider purchasing. I do, however, miss the days when Muddy Waters would live up to its name and cast aspersions on the accounting practices of some Chinese companies. That always represented a good opportunity to sell puts a few days later and then merrily go on your way when the waters calmed. Someday, I’m fairly confident that most, if not all of the fears that we have regarding accounting practices will become reality. I’m hopeful that it’s not this week, as I already own shares of Baidu by virtue of being assigned $97.50 puts on Friday (February 7, 2013). If you don’t mind wild swings within a 10% range on a seemingly regular basis, Baidu is a good way to generate income. My experience with shares has been that a moment or two after its price performance looks bleak, it bounces right back. It is a good example of why gloom shouldn’t be a deterrent, but I doubt the Postmaster General is paying any attention to me.

Riverbed Technology (RVBD) was a potential earnings choice last week. As usual it’s price movements tend to be exaggerated after it announces earnings, particularly since they tend to give pessimistic guidance. Back in the old days you would give pessimistic guidance and then shares would soar when earnings surpassed the forecast. That was so yesterday’s social contract. RIverbed reported record revenues, in-line EPS data, but offered a weak outlook. SO what else is new? Its shares have been one of my greatest option premium producers for years and I look for every opportunity to either own shares or sell puts.

Buffalo Wild Wings (BWLD) is one of those places that I would love to visit, but know that it may not be worth trading off a few years of my life. It is also one of those companies that tends to have exaggerated moves following earnings release. In this case about 1.4% for a 10% drop in share price. The biggest caveat is that Buffalo Wild Wings has shown that it can easily drop 15% on earnings release.

Cliffs Natural Resources is not for the faint of heart. It bounces around on rumors of the Chinese economy’s well being and global growth. It is a good example of forecaster’s inability to forecast, as it recently fully recovered from a recent major downgrade from Goldman Sachs (GS), which at least was consistent in demonstrating that predicting commodity prices was not one of its strengths. On top of its usual volatility, Cliffs Natural reports earnings this week and has yet to announce its next dividend, which is currently at nearly 7%. I already own shares and have so, on and off for a few months. If I did anything, it would most likely be through the sale of well out of the money puts, seeking to return 1-1.5% for the week.

Finally, it’s yet another retailer, Michael Kors (KORS), and it is a difficult one to ignore as it reports its earnings this week. As with most all “PEE” selections, it is very capable of making large moves upon releasing earnings and providing guidance. In this case, the ratio that may lure me into committing to another retailer is a 1% ROI in exchange for a 10% or less drop in share price.

Traditional Stocks: British Petroleum, Southwestern Energy, The Limited

Momentum Stocks: Baidu, Riverbed Technology

Double Dip Dividend: British Petroleum (ex-div 2/13), DuPont (ex-div2/13), Walter Energy (ex-div 2/13)

Premiums Enhanced by Earnings: Buffalo Wild Wings (2/12 PM), Cliffs Natural (2/12 PM), Kors (2/12 AM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.

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Weekend Update – February 3, 2013

On Wednesday evening, Bloomberg Rewind host, Matt Miller tweeted that he was interviewing Wilbur Ross in a live segment in a few moments and was soliciting questions for one of the century’s greatest investors and serial turnaround artists.

Never really needing a reason to Tweet, I was nonetheless pleased that my question was chosen, but I especially liked the ultimate answer. I simply wanted to know if the cool and calm demeanor that Wilbur Ross always displays when on television was ever belied by emotion that got in the way of a business or management decision.

The answer was, to me, at least, incredibly profound and absolutely reflective of the persona that we get to see when he makes appearances. Ross said that in takeovers things often do not go as planned, but you have to “roll with the punches.” He further went on to point out that emotions conspire to work against you in making decisions and taking actions. He was calm and collected in his response and barely showed any facial grimacing or twitching when the question was being asked.

I, on the other hand was twitching, contorting and breathing rapidly at the mere use of my question. I do the same with every tick up and down of every stock I own.

My initial thought was that was probably among the best pieces of advice that could ever be given, but it was just too bad that human nature so reflexively intervenes.

One of the things that I like about buying stocks and then selling calls is that it takes so much of the emotion out of the equation. It also frees you from being held hostage to each and every dive that shares can take for no rational reason. This week alone we watched Petrobras (PBR) drop nearly 10% as it announced fuel increases that Deutsche Bank (DB) described as a “positive” action and Chesapeake Energy (CHK) surge 10% on news that their founder and CEO, Aubrey McClendon, would be leaving in 3 months. In the case of Chesapeake Energy that surge was dissipated in just a day, although that may have been as irrational as the initial move.

Recently, large adverse moves impacted shares of Tiffany (TIF) and YUM Brands (YUM) as downgrades, stories, rumors, a smattering of data and a myriad of other factors took their turns at poking holes in whatever support existed for share price. Of course, they weren’t alone in the cross hairs of the barrage of often transiently irrelevant “facts.”

But by and large, if you sell covered options you can roll with the punches. Instead of feeling the anguish when your stock takes a hit it’s similar to seeing road-kill. It’s terrible, it’s a tragedy, but for the most part you realize that in the big picture it’s all just a blip. Those options that someone else was kind enough to buy from you protect you from having to suffer through the anguish and gives you a chance to get over the initial emotional reaction so that when it is time to make a decision, such as at the end of the option period, you can do so with a far less clouded mind.

Wouldn’t it be nice to have a little Wilbur Ross inside of all of us? Maybe even better would be to be his sole heir, though.

As everyone seemed to be giddy about the fact that the DJIA briefly crossed 140000 for the first time since 2007, I reminded myself of how short a period of time it remained there and then saw that the slopes of the periods preceding the 2007 and 2013 tops are remarkably similar. If anything, maybe a bit more steep this time around?

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Fortunately for me that was the time I learned to start going with the punches and had already started protecting my stocks with calls and then used the premiums generated to purchase more shares during the ensuing drops.

Not that history is ever in a position to repeat itself, but we’ve seen this before.

As always, this week’s potential stock positions are all intended as part of a covered option strategy, whether through the sale of covered calls or puts. The selections fall into the usual categories of Traditional, Momentum, Double Dip Dividends or “PEE” stocks (see details).

As the market found itself celebrating jobs on Friday, one sector that was left behind was retail. Among my favorites this year has been The Gap (GPS). They’re mundan
e, not terribly innovative, but they are ubiquitous and always a safe fashion choice. Although its next support level appears to be 10% lower it does offer an appealing enough option premium to accept that risk of wearing brown shoes with a tuxedo.

Murphy Oil (MUR) just took a large hit after announcing earnings. More and more I question the extreme earnings related reactions. What seems to separate some stocks from one another is the rapidity at which they recover from those reactions. The faster the recovery the easier it is to call it an over-reaction. Otherwise, if I own such shares and they don’t rebound quickly, it’s just a case of them being under-appreciated. In Murphy Oil’s case, I think it was a welcome over-reaction.

Southwestern Energy (SWN) has been lagging behind some of its sector mates thus far in 2013, but that situation is reversed if looking at the one year comparisons. It reports earnings early in the March 2013 option cycle and I believe may be poised to challenge its 52 week high.

I’m somewhat reluctant to consider adding Intel shares (INTC) this week. The only lure is the dividend that comes along with it as it goes ex-dividend on February 5, 2013. My reluctance stems from the fact that if I add shares my Intel position will be too large and it has been a disappointingly under-performing asset in the months I’ve held shares, having waited a long time for something of a rebound. While I don’t expect $24 or $25 any day soon, I’m comfortable with $21, a dividend and some option premiums. At least that would ease some of the paper cuts on my wrists.

Starbucks (SBUX) another favorite is a reluctant choice this week, as well, but only because of its strong gain in Friday’s trading and the fact that its option contracts are spread a bit too far apart. With more and more options being offered at strike prices in $1 and even $0.50 gradations the $2.50 and $5 differences seen with some stocks makes them less appealing, especially if selling options to optimize income production over share gains. What’s really needed is for more people to read these articles and drive up the option trading voliume as they realize what an opportunity exists.

Chesapeake Energy has been in the news quite a bit this year, but for all of the wrong reasons. AS usual, its high profile story this week concerned its founder and CEO, Aubrey McClendon. The market quickly added 10% to share value upon learning that McClendon will be leaving the company in April 2013. It quickly gave that gain up during the course of the rest of this week. This is a position, that if I decide to enter, would likely be done on the basis of selling put options. That has been a common theme as I’ve re-entered Chesapeake Energy positions over the years.

What again distinguishes this week’s target stocks is that there is greater emphasis on risk, specifically earnings related risk, as Friday’s jobs data numbers fueled a strong week ending rally that further added to already high stock prices, making bargains harder to find.

Acme Packet (APKT) was one of the first earnings related situations that I described in an article entitled “Turning Hatred into Profits” that sought to create income from either disappointment or reaffirmation. It’s share price is higher now than it was the last time around, but I think that a 1% or more ROI for the chance that it’s share price may go down 10% or less after earnings is a reasonable risk-reward venture. If it works again, I may even try to understand what it is that Acme Packet does the next time earnings season rolls around.

Baidu (BIDU) has been on my lists for the past 2 months or so and has been purchased several times. Under the best and calmest of circumstances it is a volatile stock and is sometimes a frustrating one to match strike price premiums with anticipated objectives because the price moves so quickly. As it gets ready to report earnings, it too can easily move 10% in either direction, yet still meet my threshold of 1% ROI for the level of risk taken.

When it comes to stocks that are capable of making big moves in either direction on any given day and especially on earnings, there aren’t many that are better at doing so than Green Mountain Coffee Roasters (GMCR). This is certainly a stock that has required “going with punches” over the past few years, but it has been a mainstay of my speculative slice of my portfolio for quite a while. I typically think in terms of 25% moves when it comes to earnings. In this case I’m looking at about a 25 to 1 proposition. A 25% drop for securing a 1% profit for one week. If not, then it’s just back to the usual Green Mountain “grind” and selling calls until shares are assigned.

While Herbalife (HLF) has been having all of the fun and getting all of the attention, poor NuSkin (NUS) has been ignored. But, it too, reports earnings this week. I have no opinion on whether NuSkin or any other company are engaged in questionably ethical business practices, I just see it as a vehicle to throw off option premium with relatively little risk, despite it’s overall risky persona. It
‘s not a stock that I would want to hold for very long, so the availability of only monthly options is of some concern.

Riverbed Technology (RVBD) was one of the most early and most frequent members of my covered call strategy. It always feels strange when I don’t have shares. As it gets ready to report earnings this coming week I’m reminded why it so often makes numerous and sizable movements, especially in response to earnings. It has a bad habit of giving pessimistic guidance, but after a long courtship you learn to accept that failing because even if punished after conference calls it always seems to get right back up.

Finally, Panera Bread (PNRA) reports earnings next week. It too is highly capable of having large earnings related movements. Its CEO has lots of Howard Schultz-like characteristics in that he truly knows the business and every intricate detail regarding his company. Interestingly, it went up almost 4% just 2 trading days before earnings are released. That kind of investor “commitment” before a scheduled event always concerns me, but I’m not yet certain just how much it scares me.

Traditional Stocks: Murphy Oil, The Gap, Southwestern Energy

Momentum Stocks: Chesapeake Energy

Double Dip Dividend: Intel (ex-div 2/5), Starbucks (ex-div 2/5)

Premiums Enhanced by Earnings: Acme Packet (2/4 PM), Baidu (2/4 PM), Panera Bread (2/5 PM), Green Mountain Coffee Roasters (2/6 PM), NuSkin (2/6 AM), Riverbed Technology (2/7 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy

 

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